Strategies & Applications Behind The 50-Day EMA (INTC, AAPL)

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Strategies & Applications Behind The 50-Day EMA (INTC, AAPL)

For traders who are maintaining positions through expected drawdowns, the 50-day moving average draws a line in the sand. When the price approaches this inflection point, our technique frequently determines whether we walk away with a well-earned profit or a painful loss. Given the implications, it becomes important to increase our knowledge of this price level as well as identify innovative approaches to manage risk when it arises.

The most typical formula divides the latest 50 price bars by the total. This produces the 50-day simple moving average (SMA) that professionals have used for decades. The formula has been modified several times throughout the years as market participants strive to design a better mousetrap. The most common form is the 50-day exponential moving average (EMA), which responds to price change faster than its simple-minded relative. This increased speed in signal creation gives it a distinct edge over the slower variant, making it the better option.

The 50-day EMA puts technicians on the 50-yard line, where they can keep an eye on the whole field for mid-term possibilities and natural counterswings following active trends, upward or down. It’s also a safe haven when the majority interprets price activity incorrectly. And, as our opposing market has often shown, the most trustworthy signals tend to emerge when the majority is on the wrong side of the action.

The 50-day EMA may be used in a variety of market strategies. It serves as a wake-up call when a position crosses the magic line after a rally or selloff. It is equally useful in shorter and higher time frames, whether applied to intraday charts, or when following long-term trends using the 50-week or 50-month versions. Alternatively, play pinball by trading oscillations between the 50-day EMA and the longer-term 200-day EMA. Even in the occult realm of market voodoo, 50/200 day crossings imply bullishgolden crosses or bearishdeath crosses.

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Pullbacks

The 50-day EMA is most useful when you’re in a trend that reverses in a natural counterswing, or when you’re reacting to an urge that’s pulling thousands of financial instruments along with it. A stop right across the moving average makes logical since it indicates intermediate support (resistance in a downtrend) that should hold under typical tape circumstances. The difficulty with this logic is that it does not perform as planned in today’s unpredictable markets.

Due to active stop hunting, the 50 and 200-day EMAs have transformed from tight lines into large zones during the previous two decades. Before establishing a stop or timing an entry at or near the moving average, consider how deep these violations will go. In these cases, patience is essential since testing at the 50-day EMA generally resolves within three to four price bars. Stay out of the way until a) the reversal occurs or b) the level breaks, resulting in a price shove against your position.

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The danger of getting it wrong will cost you money, so how long should you stay when price challenges the 50-day moving average? While there is no foolproof method for avoiding whipsaws, checking other technicals often pinpoints the precise length of a reversal. Intel (INTC), for example, recovered to its January high in April before falling under the 50-day EMA. It broke through support, fell to the.386 Fibonacci rally retracement, and then rallied back to the moving average the next day. On the third day, the stock found support and began to rebound, completing a cup and handle breakout pattern.

50-Day Fractals

Moving averages perform equally effectively in smaller and higher time spans. As a consequence, displaying 50-bar EMAs on 15 and 60 minute charts will aid day traders since they identify natural end points for intraday oscillations. Just bear in mind that as the time period lowers, the value of the 5 and 1 minute charts reduces. On the other hand, on weekly and monthly charts, the indicator is quite reliable, often predicting precise turning points in corrections and long-term trends.

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This makes sense given that the 50-week EMA establishes mean reversion over a full year, but the 50-month EMA follows market activity over more than four years, nearing the usual duration of a normal economic cycle. Market timers may utilize these long-term moving averages to construct successful positions that can last months or years, while violations provide ideal levels for profit taking and reallocating money into other long-term instruments.

Image by Sabrina Jiang © Investopedia2020

In 2009 and 2013, Apple (AAPL) created fantastic buying chances near the 50-month EMA. It broke moving average support in September 2008 and spent 5 months grinding sideways before reclaiming it in April 2009, providing a “failure of a failure”buy signal that generated more than 80 points over three years. In 2013, it challenged the moving average for the second time, spending four months constructing a double bottom that ignited a 100 percent surge into 2014. Take note of how the lows neatly met support, providing an exceptional low risk entrance for patient market participants.

50-200 Day Pinball

Fast moves in either direction tend to widen the gap between the 50 and 200-day EMAs. When a countertrend breaches one of these averages, it often spills over to the other, resulting in a few rounds of the 50-200 “pinball” method. Swing traders benefit from this two-sided strategy because they may go long and then short until one side of the box gives way to a more active trend impulse.

Image by Sabrina Jiang © Investopedia2020

After a protracted rise, Biogen (BIIB) reached a new high in March before entering a severe drop that broke the 50-day EMA a few days later. Price activity then launched a two-month game of 50-200 pinball, bouncing more than 75 points between fresh resistance at the 50-day EMA and long-term support at the 200-day EMA. Swing reversals occurred around target levels, giving for simple entry and reasonably tight stops for a triple-digit stock.

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Bullish and Bearish Crossovers

Many experts feel that the downward crossing of the 50-day EMA through the 200-day EMA heralds the conclusion of an uptrend. An upward crossing, often known as a golden cross, is said to have comparable magical characteristics in initiating a fresh upswing. In actuality, several crisscrosses might appear over the life cycle of an uptrend or downturn, and these traditional signs are unreliable.

Image by Sabrina Jiang © Investopedia2020

The 50 and 200-week EMAs are a different tale. Going back 15 years, SPDR S&P Trust (SPY) has four genuine cross signals, two in each direction. More crucially, throughout this period, which covered three bull markets and two bear markets, there were no false signals. According to historical Dow Industrial statistics, the last invalid cross happened in 1982, more than 30 years ago. This indicates that golden and death crosses have a legitimate position in market research.

The Bottom Line

The 50-day exponential moving average (EMA) provides a natural mean reversion level for the intermediate time frame. It offers a wide range of applications, including price prediction, position selection, and strategy development. Traders, market timers, and investors all benefit from 50-day EMA research, making it an essential component of technical market analysis.

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